A Share buyback, also known as a repurchase, is the re-acquisition by a company of its own outstanding shares that reduces the number of its shares on the open market. It represents a more flexible way (relative to dividends) of returning money to shareholders.
Companies buy back shares for a number of reasons, such as to increase the value of shares still available by reducing the supply of them or eliminate any threats by shareholders who may be looking for a controlling stake. A company may feel its shares are undervalued and buy them back to provide investors with a return, and because the company is bullish on its current operations. A buyback also boosts the proportional share of earnings a share is allocated; all else equal, this boosts the valuation of a stock even if it maintains the same price-to-earnings (P/E) ratio.
Methods of Buyback
- Open Market: The most common share repurchase method in the US is the open-market stock repurchase, representing almost 75% of all repurchases. A firm will announce that it will repurchase some shares in the open market from time to time as market conditions dictate and maintains the option of deciding whether, when, and how much to repurchase.
- Fixed Price Tender: All tender offer repurchases were executed using a fixed price tender offer. This offer specifies in advance a single purchase price, the number of shares sought, and the duration of the offer, with public disclosure required. The offer may be made conditional upon receiving tenders of a minimum number of shares, and it may permit withdrawal of tendered shares prior to the offer’s expiration date. Shareholders decide whether or not to participate, and if so, the number of shares to tender to the firm at the specified price.
If you are an eligible shareholder as of the buyback record date, then you will receive a Tender form to your registered email id from the Company’s RTA (Registrar and Transfer agents). The primary detail you need to fill in the form is the number of shares offered by you for the Buyback. You can place a Bid for a minimum of 1 share to a maximum of the number of shares in your holding as of Record date. You’ll have to mention the number of shares you wish to tender/offer in the Buyback tender form. After allotment, if shares beyond eligible Buyback entitlement exceed your allotted quantity, it will be transferred back to your Demat account by the RTA. The allotted Buyback amount will be credited directly to your bank account by the company’s RTA.